The United States, the Seven Sisters, and the Rise of OPEC, 1945–1973

In 1945, the United States was the world’s largest oil producer, accounting for more than 50 percent of global output.¹ Yet the rate of domestic discoveries was declining relative to consumption, which had increased during World War II (1939–1945) and was predicted to grow even greater during the transition to peacetime. By 1948, the United States had become a net importer of crude oil, and the ratio of reserves to consumption had fallen from 14:1 to 10:1.² To meet future domestic demand, the United States turned to foreign sources of petroleum, which were also of crucial importance to the reconstruction of the West in the wake of World War II.³ Most of the world’s oil was found in Latin America and the Middle East, particularly in the oil-rich Arab states of the Persian Gulf. This increase in non-US production was facilitated by the multinational oil companies that owned concessions in the oil-producing states: five US companies, one British, and one Anglo-Dutch company were collectively known as the “Seven Sisters” and formed the foundation of the international energy system, also known as the “postwar petroleum order,” feeding demand in the West with cheap crude oil.⁴

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Figure 1. The Seven Sisters, multinational companies that controlled global oil. CC BY-SA 4.0.

By the 1950s, most oil concessions were based on the “fifty–fifty” division of profits, whereby the companies split proceeds evenly with local governments.⁵ There were significant advantages to such a scheme: The provision of an even share of the profits placated governments, while the US oil companies could claim a domestic tax credit to cover the costs of paying the 50 percent tax on profits to the local governments. This “golden gimmick,” established between US companies and the government of Saudi Arabia in December 1950 with the approval of the US State Department, effectively subsidized the operations of the companies at the expense of the US taxpayer. The companies were given protection from anti-trust laws, allowing them to work together to manage Middle Eastern oil production in the name of “national security.”⁶ The foundation of the postwar petroleum order was a close partnership between the companies and the US government, which used the companies to secure access to oil both for domestic consumption and to feed the energy demand in Western Europe and Japan.

The multinationals exercised almost total control over the international oil industry, maintaining their grip on prices and rates of production. While producing governments constantly pressured the companies for a larger “take,” they could do little to gain further control over their industries. In 1951, Prime Minister Mohammed Mossadegh nationalized Iran’s oil industry, which was owned by the Anglo-Iranian Oil Company (AIOC, later BP). In response, BP and the other companies instituted a boycott of Iranian oil. Iran was unable to sell any of its oil and quickly fell into economic turmoil. Mossadegh was then overthrown by a CIA coup d’état in August 1953 and replaced by a pro-US dictatorship led by the shah, and in October 1954 the industry was “de-nationalized” and placed in the hands of an international oil consortium.⁷ The lesson of Mossadegh was vivid: Nations that openly challenged the companies courted isolation and disaster.

With production in the hands of the multinationals and guarded by the watchful eye of the United States, global oil consumption increased dramatically. Between 1949 and 1970, US oil consumption rose from 5.8 million to 16.4 million barrels per day (bpd). In Western Europe, consumption increased from less than one million bpd to 14 million bpd.⁸ And in Japan, it rose from practically nothing to 4.4 million bpd. It was the “Golden Age” of oil, fueled in part by the immense expansion in the world’s automotive fleet, which reached 2.5 billion cars and trucks by 1970.⁹

For nationalist leaders in Latin America and the Middle East, the dominance of the oil companies was a bitter pill to swallow. Oil formed the bedrock of state finances, contributing between 57 and 80 percent of foreign exchange balances, as well as 53 percent of the state budget in Iraq, 97 percent in Kuwait, and 71 percent in Saudi Arabia.¹⁰ Yet despite oil’s importance, the producing states had little say in how the oil was produced, marketed, or sold. They felt as though they were at the mercy of the multinationals, which realized immense profits while returning only a small portion of the earnings to local governments.

In 1959, in response to a glut on the market, the companies cut the price of oil by $0.18/barrel. Since the annual payments made to producing governments were calculated on the basis of international prices, the cut represented a serious blow to the finances of the producers. Leaders from oil-producing states accused the companies of imposing unilateral cuts to producer states’ incomes. Saudi oil minister Abdullah Tariki and Venezuela’s Juan Perez Alfonso were both highly critical of the companies’ control over price and production, which they felt was inequitable. The two men signed a secret agreement, the Mahdi Pact, in which each promised to undertake group action against the companies should they cut prices a second time.¹¹ In August 1960, the companies cut the price once again. Tariki, Perez Alfonso, and the oil ministers of Iran, Iraq, and Kuwait met in Baghdad and announced the formation of a new association, designed to form a united front against the companies: the Organization of the Petroleum Exporting Countries (OPEC). The original five members were later joined by Indonesia, Libya, Qatar, and Algeria.¹²

Initially, OPEC had a minor impact on the oil status quo. Oil remained abundant, the position of the companies cemented by the fifty–fifty contracts and backed by the prestige of the United States. While Tariki and Perez Alfonso supported cuts to production and other measures designed to force the companies to offer better terms and higher prices, most of the OPEC states were wary of walking down the same path as Mossadegh. The membership of OPEC was diverse, further compounding its disunity. Indonesia and Venezuela pushed for measures that would increase the price of Middle Eastern oil, thereby increasing the competitive advantage of their own output. States opposed to the United States and the multinationals on ideological grounds, such as Iraq and Algeria, hoped for a revolutionary expropriation of the companies’ assets. Moderate states, led by Saudi Arabia, Iran, and Kuwait, called for a gradual transfer of power from the companies to the governments. In Riyadh, the fiery Tariki was replaced in 1962 by the diplomatic, calculating Ahmed Zaki Yamani, who hoped to maintain good relations with the West while slowly increasing state ownership of national oil industries, a process he referred to as “participation.” For most of the 1960s, debates and disagreements between “insurrectionists” and “gradualists” paralyzed the organization and prevented it from forming a united front.¹³ Conservative regimes worried that radical positions might alienate the consuming countries and leave OPEC without a market. Their dependence on oil revenues left them at a disadvantage. As one British official noted in 1964, “The Arabs cannot drink their oil.”¹⁴ Despite disunity, OPEC was able to prevent further cuts to the price of oil, while over time the companies came to recognize OPEC’s status as a major international organization. Negotiating with OPEC members enabled the majors to maintain the “balancing act” that preserved their dominance of the international energy system while preventing supply from exceeding demand.¹⁵

In the Middle East, oil politics intermingled with other regional issues, including the Arab–Israeli conflict, the global Cold War, and Arab nationalism. In 1967, in response to US support for Israel during the Six Day War, the Arab members of OPEC instituted an oil embargo of the United States, refusing to allow their oil to be loaded onto US-bound tankers. The embargo failed, in part because non-Arab OPEC members refused to join. The United States was able to increase domestic production and made up for the shortfall in Arab production by drawing on Venezuela and Iran, which were both eager to increase their market share. Saudi Arabia participated in the embargo with great reluctance, resisting pressure from other OPEC members to begin nationalizing US oil assets. Shortly after the crisis was over, Saudi Arabia created a new group, the Organization of Arab Petroleum Exporting Countries (OAPEC), to better control other Arab producers and prevent them from undertaking policies that might damage Riyadh’s markets or its relationship with the United States.¹⁶

The failure of the first Arab oil embargo emboldened US observers, who were skeptical of OPEC’s power to influence energy security. Yet the episode illustrated how a political issue could galvanize the support of producers, some of whom were anxious to use the “oil weapon” as a way of pressuring the United States to abandon its support for Israel. It also demonstrated how the oil world’s center of gravity had shifted. In 1950, half the world’s oil came from the United States, both the leading producer and consumer of oil products. By 1973, that figure fell to 18 percent.¹⁷ The depletion of domestic US reserves was partially due to specific policies undertaken by the US government on behalf of domestic oil companies, who were opposed to cheap foreign imports that might out-compete with domestic sources. In 1957, President Dwight D. Eisenhower instituted voluntary import quotas, capping imports at 9 percent of consumption. In 1959, these quotas became mandatory. While this protected the market share of the smaller domestic US companies, it had the side effect of draining US reserves more quickly. Domestic production was still growing in the late 1960s, but it peaked in 1970 and began a long, slow decline thereafter.¹⁸ Oil consultant Walter J. Levy warned that a second embargo could have a devastating impact on the United States once the oil supply glut eased.¹⁹

Throughout the 1960s, the Seven Sisters still controlled the flow of oil from the OPEC members, but they were not quite as formidable as they had once appeared. The companies were under constant pressure to cede more and more of their profits to the governments in royalties or taxes: From a share of 50 percent in 1950, the companies were paying 80 percent of profits in taxes or royalties to the OPEC governments by 1970.²⁰ This was feasible only because oil remained extremely profitable and because international demand permitted a constant increase in production. Thus, total profits fell only slightly, from $1.7 billion in 1963 to $1.6 billion in 1969.²¹ The multinationals expected oil consumption to double between 1970 and 1980, as it had done between 1955 and 1970. The industry faced the daunting prospect of finding 900 billion barrels of oil to meet future demand, when existing reserves numbered only 620 billion barrels.²² Nearly all future production growth was expected to come from the OPEC states, particularly its Arab members. This placed increasing pressure on the companies, who hoped to retain their access to Middle East oil. They worried that close association with US policy in Israel would leave them exposed to Arab reprisals.

By the 1970s, the power dynamic surrounding the companies had shifted. American power was on the decline, due to both economic problems at home and the deepening morass of the Vietnam War. To preserve the peace in the Middle East, the United States turned to regional proxies such as Iran and Saudi Arabia. This approach, championed by President Richard M. Nixon, viewed the two pro-US oil producers as the “twin pillars” upon which regional security, and the continued flow of oil, would rest comfortably.²³ The shah of Iran used his country’s strategic importance and leveraged his close relationship with President Nixon in order to obtain more concessions from the companies.²⁴ The need to satisfy these allies represented a potential conflict for the United States, since support for Israel could endanger the Seven Sisters’ concessions and US access to Middle Eastern oil. Iran was a friend to Israel, but Saudi Arabia, while a staunch ally of the United States, could not resist Arab nationalist pressure to join in opposition to Israel. By the early 1970s, King Faisal of Saudi Arabia was warning the United States that Arab oil states would eventually be forced to take action against the United States, should it support Israel in another Arab–Israeli conflict. Together with the changing supply–demand balance, the geopolitics of the Middle East represented the crucial backdrop to the events of the first “oil shock” of 1973–1974.

The First Oil Shock and the Rise of OPEC

The first major blow against the Seven Sisters was struck in Libya. In 1969, a revolt of army officers overthrew the pro-Western monarchy and installed a new regime led by Muammar Qaddafi. Libya’s new government demanded that the companies operating inside Libya agree to an immediate increase in the price of exported Libyan oil. Qaddafi was in a unique position. Since the closure of the Suez Canal after the June 1967 war, Libyan oil enjoyed a competitive advantage in the Western European oil market. Most of the companies operating in Libya were smaller “independents” that relied on access to Libyan crude. This dependence made them vulnerable to pressure from Qaddafi. Finally, as a country with a small population and a large currency reserve, Libya could afford to reduce or even end its oil exports without suffering immediate economic catastrophe.²⁵

Had the companies succeeded in working together, they may have been able to call Qaddafi’s bluff, isolating Libya as they had done to Iran in the early 1950s. But the multinationals were divided among themselves, and the two largest companies active in Libya, Occidental and Exxon, would not cooperate with one another. As a result, Libya was able to negotiate with each company separately, winning major concessions and facilitating an increase in prices that boosted government revenue. The breakthrough in Libya immediately led to a cascade of demands from other OPEC states, who now insisted on parity with Libya. The companies dubbed the phenomenon “leap-frogging”: when one country’s demands were met, the remaining producers would all demand the same terms, plus something extra. Changing economic conditions, including the devaluation of the US dollar in 1971 and a tightening supply–demand balance, encouraged the OPEC states to ask for greater concessions from the companies. In 1971, two agreements were reached between the companies and the OPEC members regarding oil prices in the Mediterranean (Tripoli Agreement) and the Persian Gulf (Tehran Agreement), which raised the price of oil by about 35 percent to roughly $3/barrel and awarded a larger share to producing states.²⁶ Yet these agreements did little to slow the momentum. Algeria nationalized several small oil companies in 1971.²⁷ In 1972, the government of Iraq finally ended its decade-long dispute with the companies by nationalizing its northern oil fields.²⁸ The tide was clearly turning against the Seven Sisters.

Meanwhile, the significance of Middle Eastern oil to the global economy had reached its apex. In 1972, the Middle East supplied 47 percent of Western European and 57 percent of Japanese energy needs. On July 1, 1973, with domestic production in decline, President Nixon ended the mandatory import quotas in place since 1959, facilitating an increase in oil imports. The United States now relied on the Middle East for 10 percent of its oil needs.²⁹ Despite warnings from James Akins, chief energy expert for the US State Department, that an interruption in the foreign oil supply would have dire economic consequences, most US leaders were notably blasé about how changes in the international energy system would impact the nation.³⁰ A major report on energy security released in August 1973 warned that “greater dependence on oil imports will affect our vulnerability to supply cutoffs,” but the report did not result in any immediate change in policy.³¹

Moreover, the US government did not take seriously the mounting threat that Arab producers, including pro-US states such as Saudi Arabia and Kuwait, would withhold oil shipments in order to pressure the United States into abandoning Israel. King Faisal of Saudi Arabia issued a public warning in the summer of 1973, telling the Washington Post that support for Israel was causing a rift to form between the United States and the Arab world.³² Secretary of State Henry F. Kissinger dismissed Arab threats to use the “oil weapon” and tended to disregard oil issues entirely. “Don’t talk to me about barrels of oil,” he told his staff, “they might as well be bottles of Coca-Cola.”³³ President Nixon doubted that any OPEC members would openly challenge the companies, since doing so would risk isolation from the global oil market. “Oil without a market, as Mr. Mossadegh learned many, many years ago, doesn’t do a country much good,” he noted in September 1973.³⁴ The US government was aware of how tight the supply–demand balance had become, but neither Kissinger nor Nixon believed the Arab states were bold enough to unsheathe the “oil weapon” a second time, nor did they seem concerned about what might happen in the event of a second oil embargo.

On October 6, 1973, Egypt and Syria launched a sudden assault against Israeli forces, hoping to push Israel out of the territories it had occupied since 1967. The president of Egypt, Anwar Sadat, met ahead of time with King Faisal of Saudi Arabia, who agreed to use the “oil weapon” to force the United States to abandon its support of Israel. Sadat’s goal was not to recapture the territory lost to Israel in 1967. Rather, he hoped to provoke a crisis that would, in Kissinger’s words, “alter the attitudes into which the parties were frozen—and thereby open the way for negotiations.”³⁵

Kissinger and Nixon both hesitated to back Israel directly, but when the Soviets began an airlift to resupply Syria and Egypt, US policymakers felt compelled to intervene to prevent a collapse of the Israeli position. On October 12, executives from several of the largest US companies implored the Nixon administration to consider the plight of their oil concessions, explained that there was “essentially no spare capacity” among the non-OPEC states, and warned that US actions in support of Israel “will have a critical and adverse effect on our relations with the moderate Arab producing countries.”³⁶ The warning had no impact on US policy, and Kissinger wrote to King Faisal of Saudi Arabia on October 14, explaining that an aerial resupply of Israel “is not intended as anti-Arab.”³⁷ In response, on October 17 Arab producers announced through OAPEC that they would cut production by 5 percent per month until all Israeli forces had withdrawn from the occupied territories; Saudi Arabia led the way with an immediate 10 percent production cut.³⁸ Israeli forces began pushing back and encircling the Egyptian Third Army in the Sinai, and on October 22 Nixon asked Congress for $2.2 billion in aid for Israel. Saudi Arabia, relenting to pressure from the more radical members of OAPEC, announced a full embargo of the United States on October 23.³⁹

When OAPEC announced the embargo, the OPEC members were locked in a new round of negotiations with the companies. Pressure had been building since 1971 for the multinationals to yield more to the OPEC states, and the crisis in the Middle East proved to be the turning point. The producers rejected out of hand a proposal from the companies to increase prices by 15 percent, instead insisting on an increase of 100 percent. Amid the crisis in the Middle East and the announcement of an oil embargo on the United States, leading price hawks such as Iran instituted a unilateral increase in price: From $3.00/barrel, the price was increased 70 percent to $5.11/barrel. In January 1974, the shah forced through yet another price increase, driving the OPEC price up to nearly $13/barrel. The companies were threatened with immediate nationalization if they did not comply.⁴⁰ The unilateral increase in the price orchestrated by OPEC in 1973–1974 signaled the end of the multinationals’ dominance over oil.

The OAPEC embargo of the United States ended in mid-March, shortly after an agreement was reached between Egypt and Israel. The embargo didn’t last long, and its ultimate efficacy has been subject to considerable skepticism.⁴¹ But together with the OPEC price hikes, the embargo brought about an “oil shock” that threw the United States and much of the Western world into a crisis. That the shock came amid war in the Middle East and the Watergate scandal at home only exacerbated its overall impact.⁴² Panic over the national oil supply led to widespread disruptions, long lines at gasoline stations, and confusion regarding future energy security. The economic impact of a 400 percent increase in the price of oil was profound and lasting. In the near term, it accelerated the rate of inflation and caused a recession worse than any since before World War II: The GNP of the United States fell 6 percent between 1973 and 1975, while unemployment rose to 9 percent.⁴³ Just as important was the psychological impact. The energy crisis laid bare the vulnerability of the United States to foreign disruptions and changed attitudes within the United States towards the geopolitics of energy. The oil companies had lost their concessions, though the high prices enabled them to realize large profits and were, therefore, not entirely unwelcome. But the “Golden Age of Oil” was over. Gone were the Seven Sisters, and in their place were the members of OPEC, who emerged from the crisis as a new force in global politics.

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Figure 2. An under-supplied US gasoline station, closed during the 1973 oil embargo. Source: US National Archives.

Dealing with OPEC, 1973–1991

The unilateral increase in the price of oil engineered by OPEC in 1973–1974 facilitated, in the words of one scholar, “the largest nonviolent transfer of wealth in human history.”⁴⁴ The OPEC members were soon awash in cash. Along with the price increase, OPEC demanded immediate negotiations for “participation” in national oil industries, championed for years by Saudi oil minister Yamani. The companies were neither in a position to argue nor inclined to object to price hikes that increased their profit margins. They could sense that their time in control of the world’s oil reserves was coming to an end, after more than a decade of slowly mounting pressure from OPEC. By 1980, the Seven Sisters had been pushed out, replaced by national oil companies (NOCs) that now controlled the bulk of the global oil supply.⁴⁵

As a group, OPEC briefly offered a vision of a new international order, where wealth was redistributed from the industrial West to the postcolonial Global South. Yet the ambitions of some postcolonial intellectuals, economists, and politicians were dashed in the aftermath of the energy crisis. The increase in the price of oil saddled most developing countries with substantial balance of payments deficits.⁴⁶ Instead of investing in the Global South, OPEC members either invested in foreign expenditures (particularly arms and luxury items) or spent their new wealth on lavish economic development projects. Most of the “petrodollars” accruing to OPEC members after 1974 ended up back in the West, as payments for goods and services or as investment in Western industries. In 1974, 20 percent of OPEC financial surplus was invested in the United States, 14 percent in the United Kingdom, and 40 percent in the currency markets of the European Economic Community (EEC).⁴⁷

In 1974, the United States finally came face to face with its growing dependence on foreign oil, now controlled by the member states of OPEC. It was a new and, at times, frightening realization that prompted a variety of responses. The Seven Sisters, accused of making “obscene profits” while American consumers suffered, were questioned by Congress and widely lambasted for their greed and negligence.⁴⁸ To ween the country off of Middle East oil, President Nixon announced “Project Independence” on November 7, 1973, and suggested that through conservation, alternative energies, and an increase in domestic oil production the United States could become “energy independent.” Several important policies emerged from the initiative, including the lowering of the highway speed limit to 55 miles per hour and the completion of a Trans-Alaskan oil pipeline, but Nixon’s plan did little to arrest the increase in US oil imports. By 1977 the United States was importing 1.3 billion barrels a year from the Middle East, or 25 percent of total oil consumed.⁴⁹

Recognizing that economic issues now presented new challenges to members of the Western world, the United States and other members of the Organization for Economic Co-Operation and Development (OECD) convened the first Washington Energy Conference in February 1974. Secretary of State Kissinger proposed a raft of policies, including energy conservation, the increase of non-Arab oil supplies, the development of alternative energy sources such as nuclear, wind, and solar power, and the formation of new transnational emergency energy policies. While the conference yielded few immediate gains, its most substantial result was the creation of the International Energy Agency (IEA), an organization through which energy-consuming nations could coordinate policies, pool data, and keep track of global oil reserves. Yet with Europe almost entirely dependent upon Middle Eastern oil, there seemed little the United States could do. “We are putting a Band-Aid on a cancer,” admitted Kissinger.⁵⁰

For some, the idea that the United States would submit to the whims of Saudi Arabia, Iran, and other oil-producing states was ludicrous. The United States remained a global superpower, and if necessary it could use military force to secure its national interests. An op-ed published in Harper’s Magazine and penned by “Miles Ignotus” argued for an armed intervention: A US expeditionary force would be dispatched to the Saudi oil fields and occupy them until OPEC agreed to lower the price of oil.⁵¹ The idea, which was presumed to come from Secretary Kissinger himself, was criticized for being too ambitious and too risky. A study by the Congressional Research Service (CRS) in 1975 found that invading and occupying the Saudi oil fields would require far more troops than “Ignotus” envisioned, and would produce widespread damage and likely leave the fields inoperable for months if not years. Discussion of an armed intervention to seize Middle East oil fields quickly petered out.⁵²

Although the energy shock of 1973–1974 disrupted the American economy and shattered assumptions of US energy security, a viable threat did not emerge from OPEC after the shock ran its course. Between 1974 and 1979, while the price of oil remained high in relative terms compared with past periods, in real terms the price declined slightly when adjusted for inflation, which was rampant throughout the decade. After an initial panic, the OECD and the United States found they could “recycle” OPEC oil by persuading OPEC states to invest their “petrodollars” in the West.⁵³ A landmark agreement was reached between the US Treasury and the Saudi government in July 1974: The Saudis were persuaded to invest billions in US debt, while purchasing billions more in military equipment.⁵⁴ While it punished American consumers and placed a heavy burden on the US economy, high oil prices had the knock-on effect of strengthening the US dollar in the wake of its 1971 devaluation, and improved US economic competitiveness with Europe. While OPEC retained a number of anti-US or pro-Soviet members, the core of the group was dominated by pro-Western governments, led by Saudi Arabia and Iran. Both were willing to sell oil to the United States and continued to invest heavily in US arms. President Nixon and his successor Gerald Ford could not afford to antagonize Iran or Saudi Arabia, which together acted as the “twin pillars” maintaining regional stability and containing Soviet influence. Yet at the same time, weapons sales to the conservative OPEC members tied them more closely to the United States, offering Washington some security against future oil embargos. Iran alone purchased $22 billion in weapons between 1970 and 1979, while Saudi Arabia purchased $3.5 billion over the same period.⁵⁵

Apart from its gradual nationalization of the Seven Sisters, OPEC took little bold action during the 1970s. It did not deploy the “oil weapon” a third time. OPEC could have exerted pressure on the United States or the OECD by cutting production, but these steps ran counter to the individual interests of the group’s most powerful member, the Kingdom of Saudi Arabia. As the single largest global oil producer, Saudi Arabia could act as a “swing producer” and use its considerable spare capacity to feed existing demand in the event of a shortage elsewhere. As a conservative, pro-US monarchy, Saudi Arabia opted for a conciliatory approach and worked throughout the 1970s to keep oil prices consistent. Given its immense production and its capacity to increase or decrease output rapidly, Riyadh found that it could “impose its will” upon its OPEC colleagues.⁵⁶

The Saudi commitment to preserving a balance in the oil market brought it back into alignment with US interests. This was proven during the “second oil shock” of 1979, which grew out of the collapse of the shah’s regime in Iran. Oil revenues and US weaponry had transformed Iran into a regional power. But the shah’s modernization programs had alienated a large swath of the population, while his increasingly repressive police state diminished his domestic popularity. Throughout 1978, the situation grew more and more unstable, as regime forces clashed with protestors. The shah, hiding a secret cancer diagnosis and paralyzed by indecision, abandoned his throne and fled the country in January 1979, paving the way for the return of popular cleric Ayatollah Ruhollah Khomeini and a new Islamic government.⁵⁷

Along with the political upheaval, thousands of Iranian oil workers went on strike to protest the shah’s regime, cutting Iranian production from 6 million bpd to 1.4 million bpd. To offset the Iranian crash, Saudi Arabia increased its output from 8.5 million to 10 million bpd, but its efforts to preserve oil prices failed as other OPEC producers maintained production levels and placed premiums on their products in order to profit from the sudden Iranian shortfall.⁵⁸ As a result, total OPEC production fell from 30 million bpd to 26 million bpd and prices shot up to $30/barrel by July 1980, producing a second “oil shock.”⁵⁹

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Figure 3. BP Statistical Review of World Energy, 67^th Edition, June 2018, p. 20.

Panic over a temporary shortfall and the sudden increase in prices triggered another economic downturn in the United States and indicated yet again the instability of the international energy system. Facing another energy crisis, US President Jimmy Carter offered a series of measures in his “Crisis of Confidence” speech in July 1979, including increasing domestic coal production and furthering the national commitment to energy conservation.⁶⁰ The Iranian revolution had disrupted more than oil prices; it had upset the US-backed regional security order, removing the strongest US ally in the Middle East. Without a pillar to rest on, Carter used the Soviet invasion of Afghanistan to formalize, for the first time, the US commitment to protecting the free flow of oil in his State of the Union Address on January 23, 1980: “An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States.”⁶¹ The Carter Doctrine, as it became known, indicated an end to the Nixon-era dependence on regional proxies. To protect global access to Middle Eastern oil, the United States was now prepared to use military action.⁶²

The Carter Doctrine established a permanent US presence in the Persian Gulf. It came with a second development: the shift in US imports away from OPEC toward non-OPEC sources. The high prices and increasing evidence of Middle East instability encouraged the development of non-OPEC production in Alaska, Great Britain, Norway, Mexico, Canada, and the Soviet Union.⁶³ Instead of rising at the same rate as the 1960s, oil consumption actually declined, falling 9 percent from 1979 to 1984.⁶⁴ A glut developed despite the Iran–Iraq War (1980–1988), which threatened the oil routes in the Persian Gulf and kept both Iraqi and Iranian production depressed. Exercising its new role as the “guardian of the Gulf,” the United States used its naval power to protect oil tankers from attack, preserving the oil supply route and preventing local instability from affecting oil prices.⁶⁵

It was clear that OPEC’s pre-eminent position was eroding. Beginning in 1981, Riyadh mandated that each OPEC member stick to a strict production quota, never producing more than was allotted. The “quota system” would ensure that supply and demand were balanced, preventing future oil shocks and maintaining OPEC market share.⁶⁶ In effect, the group would act as a formal cartel.⁶⁷ The problem, however, was that OPEC members didn’t like quotas, particularly when prices were high. Each member hoped to produce as much as possible, and many cheated on their quotas and produced more than was needed. The policies, according to OPEC’s deputy secretary general Fadhil J. Al-Chalabi, were “self-defeating”: OPEC oil was artificially overpriced, and lost market share to cheaper oil from non-OPEC producers.⁶⁸ To maintain the high price, Saudi Arabia cut production between 1981 and 1985, suffering a significant decrease in oil revenues: Earnings from oil fell from $119 billion in 1981 to $26 billion in 1985.⁶⁹ In 1986, Riyadh decided to reverse course. Saudi production spiked, filling the market with cheap crude and causing oil prices to crash worldwide. The “third oil shock,” or “counter-shock,” illustrated OPEC disunity and the Saudi power over the supply–demand balance.⁷⁰ But it was also a turning point, marking the end of OPEC’s post-1973 dominance and its control over prices. Henceforth, the global price of oil would become increasingly fluid, and in 1989 OPEC abandoned a set price in favor of a “targeted” price that oscillated according to changes in the international market.⁷¹

While Saudi Arabia fought to impose discipline over its OPEC colleagues, instability in the heart of the world’s oil industry brought OPEC’s leader and the United States back together. In 1990, facing immense debts in the aftermath of the Iran–Iraq War, Iraq’s president Saddam Hussein decided to invade neighboring Kuwait. Control over the tiny emirate, which Iraq had attempted to claim in the 1960s, would give Hussein control over nearly 20 percent of global proven oil reserves.⁷² The invasion triggered a crisis in the Middle East that saw Saudi Arabia turning to the United States for assistance, a call that US President George H. W. Bush was happy to answer. “An Iraq permitted to swallow Kuwait,” Bush said in September 1990, “would have the economic and military power … to intimidate and coerce its neighbors—neighbors who control the lion’s share of the world’s remaining oil reserves.”⁷³ Half a million American troops were dispatched to defend Saudi Arabia, and in February 1991 Iraqi forces were expelled from Kuwait by coalition forces led by the United States. It was the Carter Doctrine in action. Meanwhile, Kuwaiti and Iraqi oil was boycotted and other OPEC members (led, once again, by Saudi Arabia) boosted output to maintain prices. While oil prices spiked somewhat in the fall of 1990, they quickly recovered.⁷⁴

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Figure 4. Oil well fires rage outside Kuwait City, 1991. Source: US Department of Defense.

The active intervention of the United States in the defense of Saudi Arabia and the restoration of Kuwaiti independence opened a new era in the US relationship with OPEC. Operation Desert Storm erased the fears in the West of another punitive Arab oil embargo and illustrated the closeness and interdependence of the world’s major oil producers and its remaining superpower. While OPEC, led by Saudi Arabia, would continue to influence global oil prices, it recognized the status of the United States as both a major oil consumer and the guarantor of the existing oil security order.

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Figure 5. BP Statistical Review of World Energy, 67^th Edition, June 2018, p.14.

The New Normal, 1991–2018

Since the First Iraq War (1990–1991), OPEC has exercised a moderate influence over global oil prices. From its core in the Middle East, OPEC grew to eleven members, including new oil states such as Nigeria, Angola, and Ecuador. The group represents about 40 percent of total global production, a decline from its peak in 1974 when it represented nearly 50 percent.⁷⁵ Along with the globalization of the world’s economy, the growing complexity of international financial markets, and the diversification of energy resources, the “OPEC effect” on prices has diminished. Oil has effectively become just like any other commodity, its price subject to the ebb and flow of the market. Consequently, prices became much more volatile during the 1990s, with frequent booms and busts.⁷⁶ While many OPEC members are wealthy, few have succeeded in transforming oil revenues into lasting economic development, and they remain dependent upon oil revenues for their balanced budgets and the overall stability of their economies. This can have serious consequences: OPEC members were squeezed by the price collapse in 1998–1999, while founding member Venezuela began experiencing catastrophic economic and financial turmoil after the price collapsed again in 2014–2016.⁷⁷

The United States has consistently maintained a close relationship with leading producer Saudi Arabia, a closeness that peaked with the administration of President George W. Bush (2001–2009). In 2003, US forces invaded Iraq, ostensibly to remove the dictatorial regime of Saddam Hussein and secure Iraqi stockpiles of WMD (weapons of mass destruction). While Iraq’s oil was not the specific target of the invasion, reducing Middle East tensions and stabilizing the region remained closely linked to US strategic aims during the Global War on Terror, a struggle in which Saudi Arabia emerged as a key ally.⁷⁸ Preserving access to oil became all the more important during the 2000–2008 period, when it seemed as if world was nearing “peak oil,” a time of permanent shortages and perpetually high prices as global production declined amid ever-rising consumption.⁷⁹ President Bush tried to push Riyadh towards higher output to ease the burden on American consumers, though never with much success, and gasoline prices climbed steadily between 2000 and 2008.⁸⁰

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Figure 6. U.S. Field Production of Crude Oil, 2018, published by U.S. Energy Information Agency (EIA) Oil.

Between 2005 and 2012, advances in drilling for “unconventional” oil and gas deposits utilizing hydraulic fracturing (“fracking”) set the stage for a dramatic recovery in American energy production. Beginning in 2010, US output began to increase. In 2018, the United States was on track to exceed the previous national record of 10 million bpd set in 1970.⁸¹ The return of the United States as a major energy producer has created a new, somewhat more antagonistic US relationship with OPEC. In 2014, in an attempt to push the new American producers out of the market, Saudi Arabia decided to increase production. As a result, prices crashed, falling to less than $30/barrel in January 2016. Yet this failed to drive US drillers out of business. A new tack was taken in 2016, as OPEC decided to cut production in order to bring prices back up. Higher prices produced more antagonism, as US President Donald Trump accused the OPEC “monopoly” of manipulating oil markets, taking advantage of US protection to keep oil prices high.⁸² This statement was made despite the Trump administration’s friendly ties to the Saudi government, and illustrates once again how oil and geopolitics intersect in ways that continue to complicate the US relationship with OPEC.

Discussion of the Literature

Early scholarship on OPEC is dominated by accounts of the organization’s rise during the 1960s and 1970s. These works, along with more recent contributions from economic historians, journalists, former oil ministers, and other industry veterans, tend to concentrate on the group’s identity as a formal oil producers’ cartel and are interested chiefly in economic issues with some consideration of political context. Of particular value are Ian Skeet, OPEC: Twenty-Five Years of Prices and Politics; Francisco Parra, Oil Politics: A Modern History of Petroleum; and Fuad Rouhani, A History of OPEC.⁸³

David S. Painter’s The Political Economy of U.S. Foreign Oil Policy, 1941–1954 is a good place to begin tracing the history of oil as an aspect of US foreign policy. This literature is heavily developed and focuses in particular upon the construction of a “postwar petroleum order” dependent upon public–private partnerships between the US government and private oil companies.⁸⁴ Scholarship that addresses the relationship between the United States and OPEC tends to concentrate on the oil shocks of the 1970s, events that figure highly in the history of the decade and that are addressed from the point of view of domestic US politics, international affairs, the changing global economy, and the history of the modern Middle East.⁸⁵ Utilizing company records, some historians are exploring the early history of OPEC and its gradual takeover of the global oil industry: Examples include the essay by Francesco Petrini, “Eight Squeezed Sisters: The Oil Majors and the Coming of the 1973 Oil Crisis,” in Elisabetta Bini, Guiliano Garavini, and Federico Romero, eds., Oil Shock: The 1973 Crisis and its Economic Legacy.⁸⁶ Two edited volumes released in 2016 and 2018 examine the 1970s oil shocks and the 1980s counter-shock, respectively, including Bini et al., Oil Shock, and Duccio Basosi, Guiliano Garavini, and Massimiliano Trentin, eds., Counter-Shock: The Oil Counter Revolution of the 1980s.⁸⁷ A look at OPEC as a vehicle for the economic liberation of the Global South by Christopher Dietrich, Oil Revolution: Anticolonial Elites, Sovereign Rights, and the Economic Culture of Decolonization examines the group’s rise and subsequent fall, arguing that internal divisions and individual interests prevented the group from facilitating a more general movement towards economic liberation.⁸⁸ While recent literature on the US relationship with OPEC is scarce, examinations of the United States’ ties to Saudi Arabia, such as Robert Vitalis, America’s Kingdom: Mythmaking on the Saudi Oil Frontier, offer a detailed look at the relationship between the world’s foremost military power and oil consumer and the nation that has led OPEC since its founding.⁸⁹ On the US dependence on “foreign oil,” the literature published early in the 21st century usually centered on oil’s scarcity and the risk of peak oil.⁹⁰ Since 2012, this focus has changed in recent studies, such as Daniel Raimi’s The Fracking Debate: The Risks, Benefits, and Uncertainties of the Shale Revolution, to one that questions the durability of the present energy order in light of changing consumption habits, the challenge of climate change, and the persistent instability plaguing both oil markets and oil-producing regions.⁹¹